U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE
EXCHANGE ACT
For the transition period from ____________ to ____________
Commission file number 1-13616
STORAGE COMPUTER CORPORATION
----------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 02-0450593
-------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
11 Riverside Street Nashua , NH 03062-1373
------------------------------------------
(Address of principal executive offices)
(603) 880-3005
--------------
(Issuer's telephone number)
N/A
--------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
The number of shares of Common Stock outstanding as of the close of business
on November 8, 1996 was 10,677,549 shares.
Transitional Small Business Disclosure Format (Check One)
Yes [ ] No [ X ]
1
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page(s)
-------
Condensed Consolidated Balance Sheets -- September 30, 1996
and December 31, 1995 .................................................. 3
Condensed Consolidated Statements of Operations -- Three months ended
September 30, 1996 and 1995; Nine months ended
September 30, 1996 and 1995............................................ 4
Condensed Consolidated Statements of Cash Flows -- Nine months
ended September 30, 1996 and 1995...................................... 5
Notes to Condensed Consolidated Financial Statements --
September 30, 1996 ..................................................... 7
Item 2. Management's Discussion and Analysis or Plan of Operation........... 8
PART II. OTHER INFORMATION
Item 5. Other Information.................................................. 15
Item 6. Exhibits and Reports of Form 8-K.................................. 15
2
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Storage Computer Corporation And Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
September 30, 1996 December 31, 1995
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $1,886,820 $ 871,101
Accounts receivable (net) 7,056,764 7,212,091
Lease contract receivable 43,533
Inventories 6,366,836 4,580,066
Prepaid expenses and other current assets 227,032 106,751
Tax refund receivable 34,003
Deferred tax asset, current portion (Note C) 399,983 529,997
---------------------- --------------------
Total current assets 15,980,968 13,334,009
---------------------- --------------------
Lease contract receivable, less current portion 160,722
---------------------- --------------------
Deferred tax asset, less current portion 579,823 588,000
---------------------- --------------------
Property and equipment, less
allowance for depreciation 888,855 790,605
---------------------- --------------------
Investment in affiliates 47,499 55,000
---------------------- --------------------
$17,657,868 $14,767,614
====================== ====================
Liabilities and Stockholders' Equity
Current liabilities
Note payable $ 1,969,220 $ 399,973
Current portion of long-term debt
and lease obligations 39,677 39,677
Accounts payable 1,824,383 2,350,730
Accrued expenses 1,813,225 990,171
Accrued income taxes 143,438 931,016
Deferred stockholder compensation 299,500 299,500
---------------------- --------------------
Total current liabilities 6,089,443 5,011,067
---------------------- --------------------
Long term debt and lease obligations,
less current portion 32,132 61,594
Long-term debt, related party 910,000 910,000
---------------------- --------------------
Total long-term liabilities 942,132 971,594
---------------------- --------------------
Stockholders' equity
Common stock 10,664 10,636
Additional paid in capital 12,238,783 12,223,860
Retained earnings (deficit) (1,623,154) (3,449,543)
---------------------- --------------------
10,626,293 8,784,953
---------------------- --------------------
$17,657,868 $14,767,614
====================== ====================
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
3
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
SEPTEMBER 30, September 30, SEPTEMBER 30,1996 September 30,
1996 1995 1995
<S> <C> <C> <C> <C>
Net sales $7,470,830 $5,735,576 $20,827,498 $15,220,214
Cost of goods sold 3,678,730 2,987,992 10,669,477 7,671,451
----------------- ----------------- -------------------- ------------------
Gross profit 3,792,100 2,747,584 10,158,021 7,548,763
----------------- ----------------- -------------------- ------------------
Operating expenses:
Selling and marketing 1,954,221 1,158,138 4,785,061 3,381,874
General and administrative 312,704 305,857 962,844 797,059
Research and development 503,487 523,959 1,551,535 1,507,349
Royalty expense 142,678 383,610
----------------- ----------------- -------------------- ------------------
2,770,412 2,130,632 7,299,440 6,069,892
----------------- ----------------- -------------------- ------------------
Operating income 1,021,688 616,952 2,858,581 1,478,871
----------------- ----------------- -------------------- ------------------
Other income (expense):
Reorganization (expense) credit 0 134,521
Foreign currency transaction gain (loss) 5,224 (279) 43,515 (9,658)
Interest income 0 13,051 39,069 68,885
Interest expense (57,911) (23,649) (169,663) (154,542)
Other income (expense) 38,182 13,664 77,667 73,362
----------------- ----------------- -------------------- ------------------
(14,505) 2,787 (9,412) 112,568
----------------- ----------------- -------------------- ------------------
Equity in net income (loss) of
affiliates 0 0 (7,501) (19,549)
----------------- ----------------- -------------------- ------------------
Income before income taxes 1,007,183 619,739 2,841,668 1,571,890
----------------- ----------------- -------------------- ------------------
Provision for federal and state
income taxes
Current tax expense 322,000 164,252 877,088 553,685
Deferred tax (benefit) expense 8,177 0 138,191 (696,237)
----------------- ----------------- -------------------- ------------------
330,177 164,252 1,015,279 (142,552)
----------------- ----------------- -------------------- ------------------
Net income 677,006 $ 455,487 $ 1,826,389 $1,714,442
================= ================= ==================== ==================
Net income per share: 0.06 0.04 0.15 0.14
Weighted average shares outstanding 12,127,839 12,030,130 12,052,245 11,921,477
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
4
<TABLE>
<CAPTION>
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
SEPTEMBER 30, September 30,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,826,389 $1,714,442
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Depreciation and amortization 249,614 195,859
Deferred tax expense (benefit) 138,191 (696,237)
Original issue discount charged due to
conversion of notes payable to common stock 74,854
Equity in net (income) loss of affiliates 7,501 19,549
(Gain) or loss on foreign currency
translation adjustment (43,515) 9,658
Changes in operating assets and liabilities:
Accounts receivable (net) 155,327 (1,379,997)
Lease contract receivable (204,255)
Inventories (1,786,770) (1,768,438)
Other assets (86,278) (263,228)
Accounts payable and accrued expenses (490,871) 534,393
--------------------- ----------------------
NET CASH (USED IN)
OPERATING ACTIVITIES (234,667) (1,559,145)
--------------------- ----------------------
CASH FLOWS USED IN INVESTING ACTIVITIES,
Purchases of property & equipment net (347,864) (216,479)
--------------------- ----------------------
CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Net advances (payments) on credit line 1,569,247
Repayment of debt (29,462) (20,508)
Issuance of common stock 14,951
Reduction of other long-term liabilities (87,000)
--------------------- ----------------------
NET CASH FLOW PROVIDED BY (USED IN)
FINANCING ACTIVITIES 1,554,736 (107,508)
--------------------- ----------------------
Effect of exchange rate changes on cash 43,514 (9,658)
--------------------- ----------------------
NET INCREASE/(DECREASE) IN CASH AND CASH
EQUIVALENTS 1,015,719 (1,892,790)
Cash and cash equivalents at beginning of period 871,101 3,288,106
--------------------- ----------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,886,820 $1,395,316
===================== ======================
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
5
<TABLE>
<CAPTION>
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Nine months Ended
SEPTEMBER 30, September 30,
1996 1995
<S> <C> <C>
Supplemental disclosures of cash flow information
Cash payments for:
Interest $114,000 $79,160
Taxes $1,714,000 $1,035,000
Supplemental schedule of noncash financing activities:
Debt converted to common stock
Increase in common stock 135
Increase in additional paid in capital 624,865
Decrease in debt $625,000
</TABLE>
See Notes to Condensed Consolidated Financial Statements
6
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
NOTE A - THE COMPANY AND BASIS OF PRESENTATION
Storage Computer Corporation (the "Company") and its subsidiaries are engaged in
the development, manufacture and sale of computer disk arrays and computer
equipment worldwide. The consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries, Storage Computer Europe GmbH,
Vermont Research Products, Inc. and Storage Computer UK Ltd. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The Company also has investments in Storage Computer (Asia) Ltd. and Storage
Computer France, SA, 20%-owned affiliates, which are accounted for by the equity
method.
On March 6, 1995, Vermont Research Products, Inc., a wholly-owned subsidiary of
the Company, acquired the entire business and substantially all of the property
and assets of Vermont Research Corporation ("VRC") in exchange for shares of
Common Stock (the "Reorganization"). The Reorganization was accounted for as a
pooling of interests. Accordingly, the results of operations of Vermont Research
Products, Inc. are included in the accompanying financial statements for all
periods presented as if the Reorganization had been consummated at the beginning
of the earliest period presented. In connection with the Reorganization, the
Company registered certain shares with the Securities and Exchange Commission to
exchange with the former shareholders of Vermont Research Corporation whereby
the Company became an SEC reporting company for the first time.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310 of
Regulation S-B. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the financial
statements and related notes included in Form 10-KSB filed by the Company with
the Securities and Exchange Commission, containing the Company's financial
statements for the fiscal year ended December 31, 1995. In the opinion of
management, the accompanying financial statements reflect all adjustments, all
of which are of a normal, recurring nature, to fairly present the Company's
consolidated financial position, results of operations and cash flows. The
results of operations for the nine months ended September 30, 1996 are not
necessarily indicative of the results to be expected for the full year.
NOTE B - CONVERSION OF DEBENTURES
In March 1995, Vermont Research Products, Inc. assumed certain debentures and
common stock purchase warrants issued by Vermont Research Corporation in 1993.
On March 7, 1995 the debenture holders converted all of the debentures
($625,000) and related warrants into 135,000 shares of the Company's Common
Stock.
7
NOTE C - DEFERRED TAX ASSET
Subsequent to the Reorganization discussed above, the Company determined that
the benefit of the net operating loss of a wholly-owned foreign subsidiary of
Vermont Research Products, Inc. was more likely than not to be realized and,
accordingly, a previously established valuation reserve against the asset was
reduced. Net income for the three month period ended March 31, 1995 was impacted
by a $685,000 reduction of the valuation reserve.
Also, in December of 1995 the Company determined that some of the benefit of the
net operating loss generated by the domestic operations of Vermont Research
Products, Inc. was more likely than not to be realized and, accordingly, a
previously established valuation reserve was reduced by approximately $525,000.
NOTE D - RECLASSIFICATIONS
Certain 1995 and 1996 amounts have been reclassified to conform with the current
period presentation.
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CAUTIONARY STATEMENT
The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors regarding forward-looking statements. From time to time, information
provided by the Company or statements made by its directors, officers, or
employees may contain "forward-looking" information which involve risk and
uncertainties. Any statements in this report that are not statements of
historical fact are forward-looking statements (including, but not limited to,
statements concerning the characteristics and the growth of the Company's market
and customers, the Company's objectives and plans for future operations,
possible acquisitions and the Company's expected liquidity and capital
resources). Such forward-looking statements are based on a number of assumptions
and involve a number of risks and uncertainties, and, accordingly, actual
results could differ materially. Factors that may cause such differences
include, but are not limited to: the continued and future acceptance of the
Company's products and services, the rate of growth in the industries of the
Company's customers; the presence of competitors with greater technical,
marketing and financial resources; the Company's ability to promptly and
effectively respond to technological change which meets evolving customer needs;
capacity and supply constraints or difficulties; and the Company's ability to
successfully integrate new operations.
8
NET SALES
Net sales for the three month period ended September 30, 1996 of $7,470,830
reflected an increase in combined product sales of $1,735,254 or 30%, compared
with the quarter ended September 30, 1995. Net sales for the nine month period
ended September 30, 1996 of $20,827,498 reflected an increase in combined
product sales of $5,607,284 or 37% compared with the nine month period ended
September 30, 1995. The increase in sales is primarily attributed to the RAID 7
product line. The Company did not initiate any price changes during the period,
except for price adjustments relating to component parts such as disk drives.
Except for sales which occur through the Central European sales office located
in Germany and the Western European sales office located in the United Kingdom,
which sales are conducted in the functional currencies of those operations, all
sales are made or denominated in US dollars to limit the amount of foreign
currency risk. At the present time the Company is analyzing the cost benefit of
hedging activities and derivative products to offset currency risk, which, in
connection with sales transactions, is currently considered minimal by
management. For a further discussion of the impact of foreign currency risks,
see the analysis and discussion of Foreign Currency Transaction Gain (Loss)
below.
COST OF GOODS SOLD
Cost of goods sold for the three month periods ended September 30, 1996 and 1995
were $3,678,730 and $2,987,992, respectively, or 49% and 52% of net sales. Cost
of goods sold for the nine month periods ended September 30, 1996 and 1995 were
$10,669,477 and $7,671,451 or 51% and 50%, respectively.
The fluctuation in the cost of goods sold as a percentage of net sales is
attributable to primarily to a greater percentage of system costs being
associated with components manufactured by third parties, for example, disk
drives, which have lower profit margins than the Company-manufactured components
contained in the Company's products.
Additionally, management has focused on developing its distributor network which
has generated sales that have a lower gross profit margin than direct sales to
end users. The Company anticipates that the development of the distributor
network will continue as the Company develops new markets, territories and
products. The Company is currently expanding its direct sales force which should
mitigate the pressure that the lower profit margins on distributor sales has on
gross profit. However, this impact is subject to the constraints caused by the
development period of the direct sales force.
9
SELLING AND MARKETING EXPENSES
Selling expenses for the three month periods ended September 30, 1996 and 1995
were $1,954,221 and $1,158,138, respectively or 26% and 20% of net sales.
Selling expenses for the nine month periods ended September 30, 1996 and 1995
were $4,785,061 and $3,381,874, respectively or 23% and 22% of net sales. The
increase in selling expenses between the three and nine month periods ended
September 30, 1996 and the comparable periods in 1995 of approximately $796,000
and $1,403,000, respectively, were primarily caused by the following: expansion
of the sales and marketing efforts reflected in hiring new personnel, opening
new sales offices and expanding existing sales offices; costs incurred relating
to tradeshows, marketing and promotional expenditures; and increased
compensation costs directly related to the increased sales volume.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three month periods ended September
30, 1996 and 1995 were $312,074 and $305,857, respectively or 4% and 5% of net
sales. General and administrative expenses for the nine month periods ended
September 30, 1996 and 1995 were $962,844 and $797,059, respectively, or 5% and
5% of net sales. The increase in general and administrative expenses between the
three and nine month periods ended September 30, 1996 and 1995 of approximately
$7,000 and $166,000, respectively resulted primarily from increased legal,
accounting and professional fees offset in part by the reduction and
reallocation of personnel.
RESEARCH AND DEVELOPMENT
Research and development expenses for the three month periods ended September
30, 1996 and 1995 were $503,487 and $523,959, respectively or 7% and 9% of net
sales. Research and development expenses for the nine month periods ended
September 30, 1996 and 1995 were $1,551,535 and $1,507,349, respectively or 7%
and 10% of net sales. The (decrease)/increase in expenditures between the three
and nine month periods ended September 30, 1996 and 1995 of approximately
$(21,000) and $44,000, respectively, resulted primarily from increased personnel
costs, patent costs and outside consulting and engineering fees, offset by the
reduction and reallocation of engineering personnel.
ROYALTY EXPENSE
Royalty expenses for the three month periods ended September 30, 1996 and 1995
were $- and $142,678 respectively, or -% and 2% of net sales. Royalty expenses
for the nine month periods ended September 30, 1996 and 1995 were $- and
$383,610, respectively or -% and 3% of net sales. The decrease in royalty
expense was caused by the termination of a royalty agreement, with a related
party, by mutual consent as of December 31, 1995.
REORGANIZATION (EXPENSE) CREDIT
The reorganization credit of $134,521 reflected in the nine month period ended
September 30, 1995 is the reversal of the remaining balance of the initial
accrual of $506,088 booked in December of 1994 to account for a reduction in the
costs associated with the Reorganization.
10
FOREIGN CURRENCY TRANSACTION GAIN (LOSS)
The foreign currency transaction gain (loss) for the three month periods ended
September 30, 1996 and 1995 were $5,224 and $(279), respectively, or .1% and
NIL% of net sales. The foreign currency transaction gain (loss) for the nine
month period ended September 30, 1996 and 1995 was $43,515 and $(9,658),
respectively, or .2% and (.1)% of net sales. The foreign currency transaction
gain (loss) for the three and nine month periods ended September 30, 1996 was
due primarily to the variation in the value of the dollar in relation to the
German mark.
The Company's foreign subsidiaries' obligations to their parent company are
denominated in US Dollars. Subsidiary transaction gains or losses related to
obligations due to inventory purchases are charged to cost of sales. There is a
potential for a foreign currency gain or loss based upon the fluctuations
between the US Dollar and the subsidiaries' functional currencies. The exposure
is limited to the time period between the accrual of such liability to the
parent in the subsidiaries' local currency and the time of its payment in US
Dollars. Other than the intercompany balances noted above, the Company does not
believe it has any material unhedged monetary assets, liabilities or commitments
which are denominated in a currency other than the operation's functional
currency, The Company expects the exposure to mitigate as its foreign
subsidiaries reach a more mature level of operation and are able to pay the
intercompany obligations in a more timely manner.
INTEREST INCOME
Interest income for the three month periods ended September 30, 1996 and 1995
was $- and $13,051, respectively, or NIL% and .2% of net sales. Interest income
for the nine month periods ended September 30, 1996 and 1995 was $39,069 and
$68,885, respectively or .2% and .5% of net sales. Interest income (decreased)
in absolute dollars between the three and nine month periods ended September 30,
1996 and 1995 by approximately $(13,000) and $(30,000), respectively, due to a
decrease in the availability of cash, caused primarily by increases in
inventory. For a further discussion of cash availablity/cash flow see the
analysis and discussion of Cash Flow (below).
INTEREST EXPENSE
Interest expense for the three month periods ended September 30, 1996 and 1995
was $57,911 and $23,649, respectively, or .8% and .4% of net sales. Interest
expense for the nine month periods ended September 30, 1996 and 1995 was
$169,663 and $154,542 or .8% and 1.0% of net sales. The increase in interest
expense for the three month period ended September 30, 1996 of approximately
$34,000 as compared to the three month period ended September 30, 1995 is the
result of increased borrowings on the Company's credit line, caused by the
timing of cash collections and payments relating to accounts receivable,
inventory and tax obligations. The increase in interest expense between the nine
month periods ended September 30, 1996 and 1995 of approximately $15,000 is the
net result of the debt conversion of $625,000 of VRP notes and warrants in March
of 1995 into stock which resulted in the recognition in the quarter ended March
31, 1995 of original issue discount on the VRP notes of approximately $70,000
which was offset by the borrowings on the Company's credit line as noted above.
11
OTHER INCOME (LOSS)
The changes in the three and nine month periods ended September 30, 1996 of
$24,518 and $4,305 is the net result of the receipt of funds relating to the
terminated VRC pension plan caused by over funding of plan contributions in
previous years, the reduction of an accrual of the VRC environmental liability,
which was not assumed as part of the Reorganization, and other non operating
expenses associated with foreign operations.
EQUITY IN NET INCOME (LOSS) OF AFFILIATES
In September 1993 the Company obtained a 20% interest in Storage Computer (Asia)
Ltd. which was formed for the purpose of selling and servicing the Company's
products in Hong Kong and China. In December of 1995 the Company obtained a 20%
interest in Storage Computer France, SA for the purpose of selling and servicing
the Company's products in France. For the nine month periods ended September 30,
1996 and 1995 the Company recognized a loss of $(7,501) and $(19,549),
respectively, from these affiliates.
PROVISION FOR FEDERAL AND STATE INCOME TAXES
The tax expense provision for the three month periods ended September 30, 1996
and 1995 was $330,177 and $164,252, respectively, resulting in effective tax
rates of approximately 33% and 27% . The tax expense provision for the nine
month periods ended September 30, 1996 and 1995 was $1,015,279 and $(142,552),
respectively, resulting in effective tax rates of approximately 36% and (9%).
The 6 percentage point increase in the effective tax rate between the three
month periods ended September 30, 1996 and 1995 resulted from operating losses
generated in 1996 at the foreign subsidiary level which are not available to
offset current taxable income in the United States. The 45 percentage point
increase in the effective tax rate between the nine month periods ended
September 30, 1996 and 1995 resulted primarily from the non taxable income
generated in 1995 relating to the reorganization expense credit and from the
foreign operating entities in 1996 generating operating losses which were not
able to be utilized to offset income generated at the US operations, the
reduction of the valuation reserve for foreign net operating losses resulting in
a tax benefit as described below and the realization of the net operating loss
tax benefit for income tax purposes in 1996.
The increase in the deferred tax benefit for the nine month period ended
September 30, 1996 of $834,428 relates primarily to the foreign tax net
operating loss carryforwards of Storage Computer UK Ltd., formerly Vermont
Research Limited, a wholly owned subsidiary of Vermont Research Products, Inc.
The valuation reserve related to the deferred tax asset was reduced since, in
management's opinion, it is more likely than not that the loss carryforwards
will be utilized, through the generation of profits at the subsidiary level.
Pursuant to UK tax law there is no statutory carryforward time limitation
relating to the tax net operating losses. The utilization of the losses is
dependent upon the wholly owned subsidiary achieving profit in the same line of
business which generated the losses, and in which it continues to operate.
Through September 30, 1996 the Company has utilized approximately $475,000 of
net operating losses.
12
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
The cash flow used for the operating activities is primarily a function of the
rapid growth of the Company, causing fluctuations in accounts receivable which
are impacted by the timing of shipments and accounts receivable collections; and
inventory purchases and subsequent payments of components to keep pace with the
sales growth.
It is anticipated that should the Company's growth and expansion rate continue
at its current trend, operating cash flow deficits may occur in the future as a
result of such expansion. However, Management believes that its growth can be
financed through additional borrowing arrangements as needed. For a further
discussion of additional borrowing arrangements see the analysis and discussion
of Debt and Equity (below).
DEBT AND EQUITY
On August 4, 1995 the Board of Directors approved, and the Company entered into
a $6,000,000 unsecured, demand line of credit with a bank to be used for the
working capital needs of the Company. The loan bears interest at the bank's
prime rate or, under certain conditions, at the bank's LIBOR Rate plus 200 basis
points. On August 20, 1996, the demand credit line was renewed with an increase
of the credit facility to $10,000,000. Management believes the credit facility
will accommodate all of its short term working capital requirements.
During the quarter ended September 30,1996, the Company had net paydown on the
credit line of approximately $333,000 which resulted in a total outstanding
liability on September 30, 1996 of approximately $1,969,220.
As of September 30, 1996, the only significant long term debt is a note with CEO
and President Mr. Theodore J. Goodlander for $910,000 with interest at prime
plus 1%, which is due in January 1998.
During the nine month period ended September 30, 1995, the Company converted
total debt with a book value of $625,000 into 135,000 shares of the Company's
Common Stock.
ACCOUNTS RECEIVABLE
The decrease in accounts receivable from December 31, 1995 to September 30, 1996
of approximately $155,000 is primarily due to the collection of accounts
receivable resulting from significant sales occurring in the quarter ended
December 31, 1995. The Company did not change its credit terms during the period
and there has been no material change in the aging of accounts receivable during
the period.
13
INVENTORY
Inventory increased approximately $1,786,770 or 39% from December 31, 1995 to
September 30, 1996. The investment in inventory is impacted by several factors,
including but not limited to, the timing of purchasing component parts such as
disk drives; the non recognition of revenue and corresponding inventory
increases due to inventory transfers deemed to be evaluation units; the timing
of inventory reductions due to intercompany transfers and increased inventory
locations throughout the United States and Europe.
CAPITAL EXPENDITURES
The Company does not have any material commitments for capital expenditures at
this time.
14
PART II. OTHER INFORMATION
Item 5. Other Information
On September 13, 1996, the Securities and Exchange Commission issued an order
declaring the Company's Registration Statement on Form S-3 (SEC File Number
333-4145 which was filed on May 21, 1996) effective as of that date. The
Registration Statement covered 2,318,200 previously issued shares of the
Company's Common Stock and effectively registered such shares which were
previously restricted. No proceeds were retained by the Company as a result of
such offering. In connection therewith, on September 13, 1996, the Company filed
amended Form 10-KSB/A for the year ended December 31, 1995, and Form 10-QSB/A
for the quarter ended March 31, 1996, as part of the S-3 filing process. No
change in earnings was reported as a result of these amended filings.
Item 6. Exhibits and Reports of Form 8-K.
(a) Exhibit 27 Financial Data Schedule:
(b) No reports on Form 8-K were filed during the quarter for which
this report is filed.
15
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
STORAGE COMPUTER CORPORATION
Registrant
Date: November 13, 1996 /s/ Theodore J. Goodlander
-------------------------------- -----------------------------------
Theodore J. Goodlander
President, Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer and
Principal Financial and Accounting
Officer)
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,886,820
<SECURITIES> 0
<RECEIVABLES> 7,100,297
<ALLOWANCES> 0
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0
0
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</TABLE>
